MSA, SOW, Consulting Agreements: The Definitive Guide (2022)

August 8, 2022

Needless to say, MSA, SOW, and consulting agreements are a vital part of your relation with consultants. Whether you’re a start-up or an established company, you need to have a contract in place to protect your interests and ensure that everyone is on the same page.

An agreement between the consulting firm and client should outline the consulting services to be provided, the fees to be charged, and the terms of the relationship and hence make a sensible move from the standpoints of both the client and the consultant.

Without a consulting agreement in place, there would be a risk of misunderstanding or disagreement later on. Therefore, it is essential to have a consulting agreement in place before any work begins to ensure the success of the project.

This definitive guide will help you understand what MSA, SOW, and consulting agreements are all about and how they can benefit your business.

What is a Consulting Agreement?

Consulting agreements are formal and legal agreements between a company and a consultant or a consulting firm. The consulting agreement defines the scope of work, duties, and responsibilities of the consultants/consulting firm, as well as the terms of compensation.

Consulting agreements may also include provisions for confidentiality, intellectual property rights, and non-compete clauses. Consulting agreements are typically used when a company needs specialized knowledge or skills that are not readily available within the organization.

By entering into a consulting agreement, the company can access the expertise of the consultants on an as-needed basis, while still maintaining control over the project or initiative.

Consulting Agreements: The Benefits

Consulting agreements are an important tool for ensuring that both parties are pleased with the project’s conclusion. Furthermore, such arrangements are crucial since they safeguard both the consultant and client.

A) Helps In Defining the Scope of Work

Consulting contracts help in defining the scope of work between the consultant and the client. With such an agreement in place, both parties can feel confident that they understand the expectations and deliverables for the project.

B) Prevents Conflicts between Both Parties

Having a consulting contract in place can help to avoid conflicts between the parties by clarifying their respective rights and obligations. Moreover, a well-drafted agreement can provide some protections for the consulting firm, such as specifying that the Intellectual Property created before the project by the consultants belongs to them only and cannot be used by the client without permission.

C) Helps in Utilizing the Services of Experts

Consulting agreements help businesses to utilize the services of experts in a particular field. For example, a business may enter into a consulting agreement with a marketing expert in order to gain access to their knowledge and expertise.

The consulting agreement will tell you how big the project is, what each party’s role is, and how much they will be paid for their services. This kind of agreement can be good for both businesses and consultants because it helps make sure that everyone knows what to expect and what they have to do.

D) Establishes Relationship and Trust

Consulting agreements help the consulting firm and the client get to know each other. With a consulting agreement in place, both parties know exactly how the relationship will work. This can help keep people from having misunderstandings and confrontations in the future.

Consulting agreements can also help in building trust and in improving communication by being clear about what is expected and what is not.

Benefits of having a consulting agreement

What Is to Be Included in a Consulting Agreement?

No matter what type of consulting work you need, it is important to have a clear and legally binding consulting agreement in place. Such contracts can vary widely in scope and terms, but there are some common elements that are typically included.

Consulting agreements would usually cover four dimensions such as:

  • Statement of Work; what will be done during the project.
  • Terms and Conditions; what will be paid and how.
  • Rules for delivery; how the work will be done.
  • Deviation management; what will be done if there is an issue.

Now, let us take a look at these above-mentioned four dimensions briefly.

#1. Statement of Work

The first step when preparing a contract is to define the Statement of Work (SOW), or in other words, your expectations for the project.

This SOW is intended to ensure that the consulting providers are committed to the outcomes rather than the means. If the performance falls short of your expectations, the contract will serve as a point of reference in a prospective lawsuit.

The statement of work serves as the cornerstone of the consulting agreement, so accuracy is crucial. It describes the project’s scope, deliverables, timeline, and anticipated outcomes. It also contains governance and escalation mechanisms in the event of things going awry.

When you have prepared a draft of the document, sit down with your consultant and go over each detail carefully and properly. Ensure that they comprehend what is expected of them and that you are on the same page regarding the project’s outputs.

#2. Payment Terms and Conditions

The next step is the terms and conditions, and this basically means the payment terms and how and when payments will be made. The contract must clearly define how the consultants will be compensated. You need to be specific about the amounts involved and the conditions attached to them.

For instance, the hourly fee structure will include the detailed amounts for each type of consultants, the kind of cap, if any (hard or soft), and the number of hours to reach the cap.

On the other hand, the risk-sharing model will define the variable compensation, the metrics on which the variable compensation is based, and how they will be measured.

Make sure that the terms you are negotiating are consistent with your organization’s policies. A helpful hint for novices: the price listed in the contract is frequently the net price (before sales tax).

Be sure to also determine the date by which payments must be made. Generally, standard terms are 30 to 60 days from the date of invoice, but they might be longer. Nevertheless, ensure that they comply with local legislation.

Also, define the payment plan as weekly, monthly, phased, lump sum, milestone-based, or deliverable-based. Large projects running over six months should, for instance, be under the monthly schedule.

Moreover, you may also include a description of the fees in the appendix.

Another piece of advice would be to use an incentive for early delivery and/or a penalty for late delivery while working on a time-sensitive project.

#3. Rules for Delivery

The rules for delivery need to be laid out beforehand in order to avoid any sort of hiccups along the way. The rules for delivery are basically the delivery guidelines and will include how the job will be completed.

The first and foremost guideline will be the confidentiality agreement between both parties. You don’t want the consultant to disclose the details of the project you worked on with other clients.

So, be sure to carefully review the contract’s intellectual property and confidentiality provisions. The wording of these provisions should be determined on a project-by-project basis.

If you are concerned about a particular type of sensitive information, you should specify your concerns in plain language in the contract. Ensure that you understand the limitations of confidentiality agreements, particularly if you work internationally.

Each culture and country approaches (and regulates) confidentiality differently. Additionally, you need to keep in mind that confidentiality should be confined in place and time.

If you work with sensitive data, you will need to ensure their security and that has to be included in the contract. Your contract should cover the following:

  • Handling data and information
  • Onboarding and vetting any consultant present on your premises and/or working on your data
  • Making sure the consultants are safe on your premises

Also very important is the subject of intellectual property. The materials made during the project belong to the customer (presentations, reports, etc.).

On the other hand, the techniques and tools used by the consulting company may be based on intellectual capital that the company has built up over time.

In that case, the consulting provider will still own the IP, and the customer should negotiate the right to use the results in the way they want.

You should also ask for the information that was gathered for you during the project, like the models made for the project and the transcripts of the interviews. Don’t just settle with the finished results alone.

You must also determine how to interact with third parties. Most consulting organizations work with external partners and sub-contractors. You can choose to be informed if a third party is working on the project or not.

In addition, you have the choice of asking them to sign a specific NDA or relying on the consulting firm to verify that their partner or sub-contractor adheres to the NDA they signed with you.

If the consulting provider is already working on sensitive projects with a competitor or a client of yours, there may be a conflict of interest. Exclusivity is negotiable, but it could come with a price tag. Or you could decide not to engage a consultant working with a direct competitor. Your call.

Furthermore, in your contract, you may want to identify specific companies or give a more general description of your competitors. If you don’t want the consulting firm to work with your rivals after the project is finished, you must include a non-compete clause.

#4. Deviation Management

Successful and effective planning will help in preparing the strategy and gaining a more holistic perspective on the project. The deviation measures allow you to consider the “what-ifs” and “worst-case” possibilities and provide alternative solutions.

When the project kicks off, everything appears to be going well, but many things can change in a long project. You should keep the terms and conditions as they are and limit the scope of the changes as much as possible.

However, if this occurs, you should document all changes to avoid future disagreements. Moreover, you can include a clause stating that changes to the contract must be made in writing.

It is not unusual for a project to evolve, for some deliverables to become irrelevant and for some others to become of pramount importance.  In the same way some projects might be cut short or extended. Those changes should be documented, especially if there is a contractual impact (i.e. cost).

Another key part of a contract is the “governing law,” which is also called “choice of law.” Keep in mind that if you have a problem with your consulting provider, the first place to look is always your contract.

You should talk to your legal team and ask which law would best protect your interests in a consulting agreement. Your consulting company may also have some requirements in this area. Don’t take them for granted, and if you have to, include them in the talks.

Also, it is important to know that in consulting, there is a fierce war for talent, just like there might be in your own field. And thus, a good rule to follow is to prevent yourself from poaching the consulting firm’s top talents and to demand the same in return.

Besides, you might also want to include a right to an audit in your agreement for specific projects. It will help in determining, for example, whether the consulting firm complies with your policies.

When including such a condition in your contract, be sure to specify who, where, and how the audit will be conducted. You must also be very clear about who will pay for it.

Lastly, in a consulting agreement, it is typical to find a limitation of liability and a disclaimer of warranty. In most cases, you must limit the risk to your business when signing into this agreement.

4 Dimensions in a consulting agreement

SOW and why it’s the Most Important Component of a Consulting Agreement?

The Statement of Work (SOW) is arguably the most important component of a consulting agreement. After all, it is the SOW that sets out the specific tasks to be performed by the consultant, as well as the deliverables to be produced.

The statement of work usually describes the following:

Scope of Work and Deliverables

The scope of work and deliverables will be very close to the scope outlined in the RFP and will be modified based on the input of the consulting providers. You can also include the RFP and proposal in the contract’s appendix to preserve the focus on the projected project outcomes.

Schedule and Phasing

The project’s timeline should be set up so that the different deadlines, such as the phasing, milestones, and delivery dates, are clear. You may also include the project timetable in the appendix like you did with the scope of work.

Governance and Escalation

You need to include a description of the governance of the project and, in particular, the escalation method in your statement of work (SOW).

Expected Outcome and Metrics

The SOW must identify the measures used to evaluate the project’s success. For intangible services such as consulting, you can set SMART objectives that serve as a guide for ensuring delivery quality.

Extension and Renewal

When the scope of the work is still not clear, it can be interesting to include the possibility of extending the contract. In the same way, you can add the conditions for renewal to a project that will happen again or that has more than one phase. In both cases, the client should be the one to decide whether the contract should be extended or renewed.

What Is an MSA?

Master Service Agreement (MSA) also goes by the aliases of framework agreement or frame contract. However, if you’ve worked in consulting procurement, you almost certainly have come across this term.

So, what really is an MSA? It is a legally binding framework agreement between the company and the client. It literally spells out how both parties will work together on all projects, both now and in the future, for a certain amount of time.

Moreover, the MSA talks about things like how the payment will be made, how to keep things private, how to settle disagreements, how to limit your liability, warranty, IP rights, and much more. Pretty much all terms that are not project specific.

However, an MSA can be complex and could potentially take up time due to its negotiation process between both parties. So, if you’re new to hiring consultants, talk to your lawyer about how to write a Master Service Agreement. It might be the best way to protect your company.

Just like any other contract, an MSA can help two companies come to a clear agreement and avoid disagreements in the future. Thus, the idea of having an MSA is to give the supplier visibility in exchange for better pricing, better delivery, and better relationships.

It will also help your internal stakeholders because you won’t have to deal with most of the legal negotiations. Instead, you can just focus on the scope of work and the price.

When Can You Use an MSA?

Ideally speaking, a Master Service Agreement should be prepared even before the first project or rather even before there is a project to work on. Moreover, an MSA can work like this.

For instance, say you are in charge of a group of products that all come from different suppliers. You think of some of them (your suppliers) as strategic because you have worked with them regularly or because they make goods that your business needs.

In order to limit the risks of disruptions, you cannot “lock” these suppliers and maintain price control over the long term. This is where the MSA becomes relevant and comes into the picture.

When defining your panel of preferred providers, you should simultaneously negotiate a master services agreement (MSA) with the most important ones at the same time. So that your internal stakeholders can cut down on the time it takes to negotiate a contract.

So, keep the MSA in mind if you are looking for ways to improve your category management strategy or if you are having trouble managing your supplier panel. It could be the key to getting what you want.

What Terms Are Covered in an MSA?

As you’ve read, the goal of a Masters Service Agreement is to speed up the contract process for subsequent projects. It also generally makes future contract agreements a lot simpler and easier. But what terms are covered in an MSA? Let’s find out!

A. Clarity on How the Performance Will Be Measured

The master agreement needs to clearly define how the success of the project will be measured. For services that are hard to measure, like consulting, you can set SMART goals as a guide to making sure the quality is there.

For example, the consultants and the company agree to meet on a regular basis to assess the performance of the project. The expected results for the project are, let’s say, 20% savings on the marketing expenses.

B. Clarity on the Expectations for the Team and the Resources

This goes without saying but consultants should really focus on the end result rather than the means. However, in some cases, the means can be significant. When you select a consulting firm based on the composition of their team or the availability of a specific expert, you can (and should) include your expectations in the contract.

C. Commercial Terms

The contract must clearly state how the consultants will be paid. Make sure you understand the amounts and the conditions associated with them.

For hourly fees, include the specific amounts for each type of consultant, the type of cap, if any (hard or soft), and the number of hours to reach the cap.

For a risk-sharing model, clearly define the variable compensation, the metrics on which it is based, and how it will be measured.

D. Expenses Management

Here you will define how expenses will be charged, what type of expenses can be reimbursed by the company, what policies should be applied for travel or meals for instance and what validations will be required prior to any expense (above a certain threshold for instance).

E. Payment Terms and Tax

All consulting agreements spell out how the money will be paid. Make sure to negotiate terms that fit with the rules of your company. Most contracts say what the net price is (before sales tax)

Set when the payment will be made, such as weekly, monthly, phase-based, or all at once. If the project is very big, you might want to use a monthly schedule.

For example, the company will pay a fee of $250,000, excluding expenses and VAT in 5 installments of $50,000 which is to be paid to the consultants on a monthly basis. Travel and other expenses will be approved in advance by the company, and charged at cost in the limits of $37,500 (15% of the fees).”

Moreover, the consulting provider could also discuss with the client about a late payment penalty. If you decide to charge a late fee, you should also offer a discount for early payment.

Besides, when a project needs to be done by a certain date, you can offer a reward for early delivery or a penalty for late delivery.

Lastly, when you have a risk-sharing model, make sure to write down the payment schedule, the amounts, and the metrics that go with them.

F. Confidentiality Clause

Consulting agreements must include a confidentiality clause. You don’t want the consultants to go around telling everyone about the project you worked on.

Besides, if you are worried about a certain kind of secret information, write it in plain English in the contract. Also, make sure you know the limits of confidentiality agreements, especially if you work internationally.

Each culture or country has its own way of handling privacy (and its own laws). Also, you should know that secrets should only be kept for a certain amount of time and in a certain place.

G. Usage of Third-Parties

You should also be clear about how to deal with third parties. Most consulting firms have partners and subcontractors who work with them. You can ask to know if someone else is working on the project or not.

Moreover, you can also choose to have them sign a specific NDA or trust the consulting firm to make sure that their partner or subcontractor follows the NDA they’ve signed with you.

H. Intellectual Properties

Another important subject that must not be forgotten about is intellectual property. Presentations, reports, etc., that are made during the project belong solely to the client.

But the consulting firm’s methods and tools might be based on intellectual capital that the firm has already built up over the years. In that case, the consulting provider will keep ownership of the IP, and the client should negotiate the right to freely use the results.

Moreover, you should also ask for the information that was collected on your behalf during the project. This includes the models that were made for the project and the interview transcripts. Don’t just be happy and satisfied with the final result.

I. Client Policies

If you work with sensitive information, you most likely have stringent security requirements that you should include in the master agreement.

Some elements that can be included are: handling data and information (Information Security policies), onboarding and vetting any consultant present on your premises and/or working on your data (Vendor Onboarding and/or Vetting requirements), and making sure the consultants are safe on your premises (Health and Safety policies).

J. Conflict of Interest and Non-Compete

If the consulting provider is already working with a competitor or a client of yours on a sensitive project, this could be a conflict of interest. You can negotiate for exclusivity, but it usually costs more.

You can also put a list of specific companies or a more general description of who your competitors are in your contract. A non-compete clause needs to be in your contract if you don’t want the consulting firm to work with your competitors after the project is done and dusted.

For both clauses though, you need to set a reasonable time limit and a reasonable scope. Since they are hard to follow, they should only be used in the most serious situations.

K. Anticipate Changes in the Project

At the start of the project, everything may seem to be going in the right direction, but a lot can change over the course of a long project. You should try to keep the terms and conditions the same and change them as little as possible.

But if it does, you should keep track of all the changes so you don’t get into a fight later on. Hence, we suggest putting in a clause that says the contract can only be changed if it is written down.

For example, a clause can be like this. “All changes on the project regarding scope, budget, deliverables, and prices will be documented

by amendments to the contract or registered in the minutes of the Steering Committee.”

L. Governing Law

A contract’s governing law, also known as “choice of law,” is also an important component. Remember that if a disagreement arises with your consulting provider, your contract is always the first point of reference.

You should consult with your legal team and ask yourself, “What law would best protect your interests in a consulting agreement?”

Your consulting provider may have some requirements on that front as well. Treat them with respect, and if necessary, include them in the negotiation as well.

M. No Solicitation of Personnel

The war of talents is very fierce in consulting, as it may be in your own industry. Thus, a good rule of thumb can be to forbid yourself from demanding the consulting firm’s best talent.

N. Liabilities, Indemnification, and Warranties

As a general rule, you should try to make the agreement with as little risk as possible for your company. Warranties and liability are usually important parts of the negotiation since the consulting firm will also want to limit their financial risk.

You can also limit your liability by requiring your consulting providers to have the right level of insurance. This is called indemnification. In a consulting agreement, there is usually a limitation of liability and a disclaimer of warranty that say how much responsibility each party handles.

O. Default and Termination

A consulting contract is typically terminated at the end of the project. The consulting firm completed the service, and the client paid for it.

There are three main reasons why a contract can be terminated before the project is completed: breach of contract, lack of performance, and force majeure.

Your termination clause should cover these cases. You can also include a provision stating that each party can terminate the contract at any time, with advanced notice.

P. The Right to Audit

In your master agreement, you might want to add a right to audit for certain projects. For instance, it will help make sure that the consulting firm is following the rules set by your client.

When you put this kind of clause in your contract, don’t forget to specify who, where, and how the auditing process will take place. Also, you need to know for sure who will pay for the auditing.

Please Note: When you are working with a frame contract, or Master Service Agreement (MSA), the statement of work will serve as the consulting agreement. It will spell out the work that needs to be done and the details of the other dimensions. The MSA, on the other hand, will explain the rest of the terms that will remain constant for other future projects.

How To Negotiate the Pricing of an MSA?

Once the bulk of the consulting contract has been pre-negotiated, and one of your business lines gets a project, it can focus solely on the project’s scope and costs. And speaking of costs, the price is indeed the most important part of an MSA. But then, how do you negotiate the price?

Let’s take a step back and look at how consulting prices are usually negotiated. The vast majority of a consulting agreement’s terms are negotiable, just as they are for many other intangible services. Obviously, you do not need to (or choose to) negotiate every issue.

What Will the Consultant Provide?

Putting the project’s goals and scope into the RFP and later figuring out what it’s for can be a risky task. A little bit like Mission Impossible, if you’d like. Your mission, if you accept it, is to get everyone on the same page while moving your company’s strategy forward.

But putting together a proposal in response to a request for proposal is very similar. It shouldn’t be a surprise that the consultants sometimes get off track. Besides, the scope may change as the sourcing process goes on. Because when you talk to consultants, you might find out that your goals were too specific, too vague, or too high. You can’t make this before you have a project, of course.

What Services the Consultants Will Offer?

The delivery model also has a significant impact on the effectiveness of a consulting project. It addresses the approach taken, the schedule, governance, team staffing, phasing, and the proportion of on- and off-site work. As a result, these are also elements that cannot be pre-negotiated.

What Will Be the Price of the Project?

Price is, of course, one of the primary aspects to think about. Although, there are different ways to look at the price. First, you can look at the total cost and compare it to your project budget.

You can also look at the price structure in terms of daily rates or the types of fees that are charged. The way costs are spread out over the different stages may also be interesting.

But whatever it may be, you must keep one thing in mind. When you’re making a choice, think about the project’s value and the effect you want it to have. Unless you are buying arms, you can’t compare the price to what it would cost you to make it yourself. The consultants can help you in technical and political ways that you can’t get from your own staff.

So, pricing can appear to be a daunting task at first. After all, there are numerous variables to consider. On the other hand, MSA pricing can be relatively simple with little planning and research.

Usually, the prices for consulting services are based on rates card, which lists the rates for each type of consultant. In consulting, rate cards can be helpful sometimes, but they can also cause problems.

For example, if your MSA includes a rate card with rates that are much lower than the current market rates, the consulting firm may be hesitant to take on projects. For instance, the consulting market is pretty tight right now, which means prices are higher than usual.

Also, if your MSA has a rate card with prices that are higher than the current market rate, you might be tempted to hire consulting firms outside of the MSA, which would defeat the whole point of the MSA.

Consulting, as you know it, is a seasonal industry, and it is not uncommon for companies to offer significant discounts during the off-season.

Meanwhile, rate cards can be used as a starting point for negotiations where each side can say what their first offer is before eventually agreeing on a set price. Thus, you should think carefully about these things before signing any consulting contracts.

5 Takeaways for the Busy Executives

  • Make your own agreement with the help of your legal team. The best way to learn all about contracts is to write them yourself. Also, it will be easier if you work with consultants all the time.
  • Be clear about what you want to happen. Put the details of what you want to happen in the contract so that the focus is on the results, not the means. The contract should be clear about the scope of work, the timeline, who is in charge, and how to measure performance.
  • Clarify the commercial and payment terms. Especially, if you don’t work with a flat fee, explain how much, when, and how the consultants will be paid.
  • Set the ground rules that the consultants must follow. You should add the clauses to your agreement if your business cares a lot about privacy, safety, or conflicts of interest.
  • Protect your business against the worst-case scenario, in which everything goes wrong. Think ahead about what could go wrong and figure out how to fix it.

That’s it! Hope you found this guide helpful. Now that you know the basics of MSA, SOW, and consulting agreements, you can go out and create your own agreement with a little more peace of mind.

If you have any questions or would like some help getting started, feel free to reach out to our team. We’re always here to help!

Helene Laffitte

Hélène Laffitte is the CEO of Consulting Quest, a Global Performance-Driven Consulting Platform. With a blend of experience in Procurement and Consulting, Hélène is passionate about helping Companies create more value through Consulting. To find out more, visit the blog or contact her directly.

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